Nearly two months of Trump: March 2017

Financial markets rallied strongly shortly after it was clear Donald Trump would be the next President. This was evident across stock, currency and bond markets, and there was also a decline in credit spreads.

Nearly two months into the Trump administration, there is still great uncertainty about just what is going to happen to US policy. The President set out a big reform agenda involving fundamental changes to trade, tax and environmental policy and they presented clear risks for a blow-out in US public debt as well as trade wars. If the full Trump campaign agenda were delivered it would have major consequences for us as the US has by far the biggest stock of direct investment in Australia, it is our third biggest export market and a big competitor in global commodity trade.

Differing emphases between the President and his senior officials, the lobbying of competing US business groups and the need to choose between alternative tax plans and assess their impact on the budget make it hard to work out what is going on in the White House. We should get more details in the next few weeks but the markets seem to have already made up their mind and have focused on the reflationary aspects of the Trump agenda with share prices, bond yields and the US$ all moving up since the election.

Parts of the Trump agenda have already been delivered – the US has pulled out of the TPP trade pact and environmental regulations are being wound back. A lot of work is under way in the administration on how far to cut US business taxes, whether a new 20% tax goes on imports into the US, how to run a more unilateral protectionist trade policy and whether the US will ignore adverse WTO rulings. So far the feared trade wars with China and Mexico have not occurred as the US has not taken any action yet – it may be coming.

We still need to see the extent to which President Trump’s ambitious reform agenda ends up being constrained by the traditional concerns of Republican politicians for free trade and holding down public debt, legal cases aimed at his immigration and environmental policies, the threat of retaliation by big trading partners and abiding by global trade rules. The President was elected on a clear platform of change and if that agenda is watered down, the risk is that his supporters will feel badly let down.